Should Online Markets be Immune from CCI scrutiny?

Recently, there was news of Bharatmatrimony.com filing a complaint against Google India with the Competition Commission of India (CCI) against Google’s alleged abuse of dominant position in its practices related to AdWords. In the same context, a remark was made at a seminar in Delhi on future of online markets that “media and particularly the online media, has to be treated differently by competition authorities as normal rules of competition may not apply”. Is it really so? Do online markets or e-commerce raise competition concerns and should, therefore, attract scrutiny by the CCI like it has attracted the attention of antitrust authorities in the US and the European Union?

The rising popularity of e-commerce has turned local commerce into a national, and often international, affair and has forced competition in the traditional market place. The internet has created enormous benefits for consumers through increased convenience, choice and efficiency. This is now a universal phenomenon no longer confined to the developed economies only.

According to a recently published study by the Internet and Mobile Association of India (IAMAI) and the Indian Market Research Bureau (IMRB), the number of internet users in India has grown from 20 million in 2005 to 121 million by 2011 end, and the numbers are growing fast. Similarly, as per the study, seven of 10 Indian web users watch online videos. The report also found that Google sites led the market as top video property, driven mainly by YouTube. The study ranked Facebook second with 6.6 million viewers and 30.1 million videos watched, followed by Metacafe in third place with 3.9 million viewers. India-based properties Network 18 and Rediff both ranked among the top 10 largest video properties reaching 1.2 million and 861,000 viewers, respectively. Noticeably, the viewership of internet sites in India is much larger than the viewership of, say STAR TV, which, reportedly stood at 25 million users. Further, according to a recently published report by the Indian Council for Research on International Economic Relations (ICRIER), a 10% increase in internet penetration in India can increase the gross domestic product (GDP) by 1.08%. In comparison, a 10% increase in mobile penetration can increase the GDP by 1.5%.

However, the number of broadband users in India, as per latest data, is just over 13 million and the government of India is targeting an ambitious 175 million broadband users by 2014 and has set aside R20,000 crore (about $4 billion) to implement a National Broadband Plan, which will extend an optical fibre network to even the panchayat level. With the growth in number of internet users and, particularly, the broadband users, as contemplated in the National Broadband Plan, e-commerce in India is bound to grow by leaps and bounds, and online stores are going to give tough competition to brick and mortar stores; like in the US, EU and other developed economies.

However, the potential benefits that e-commerce can make to the economy, and to the quality of our lives as consumers, are limited only by those forces that impede the competitive process. And are there any indications of such anti-competitive practices having already started in the online markets? Let us look at the facts.

Google is already facing investigation by the US Federal Trade Commission. Apart from the recent complaint against Google by Bharatmatrimony.com, a preliminary information report was also filed against Facebook in India before the CCI seeking detailed investigation against virtual currency credits given by Facebook on the basis of a similar complaint filed in the US. As per the information, like in the US, in India too, Facebook can potentially engage in anti-competitive and unfair business practices in the market for virtual goods purchased in social games through its Facebook credit terms and therefore its activities in this regard need to be investigated. The European Commission has recently opened formal antitrust proceedings to investigate likely anti-competitive practices against leading international publishers, possibly with the help of Apple, in the sale of e-books in the European Economic Area. Apart from the antitrust investigations, the online markets and the internet companies are also facing the prospect of regulatory control in the US for online piracy through the much-protested Stop Online Piracy Act (SOPA) and Protect Intellectual Property Act (PIPA), which are pending consideration before the US Senate.

What are these anti-competitive practices that have invited attention of antitrust authorities worldwide? Are they in any way different from what are found in other sectors? The answer has to be in the negative. Like in any other oligopolistic market, huge market shares (over 90%) provides a natural temptation to market giants like Google or Facebook to exercise “market power” by indulging in either exclusionary or exploitative conducts, unless checked by competition authorities in time. Online markets, like mobile networks, exhibit strong “network effect” ie the value of the product

or service increases with each added user, which reduces the variable cost to almost zero for large players like Google or Facebook with billion of users worldwide. Like in the case of economies of scale, network effects can make it hard for a new firm to enter the market where the minimum viable scale of network is large in relation to the size of the market. Thus, markets with network effects are characterised by such inherent “entry barriers” for new entrants because of large networks of existing players created due to the first-mover advantage, for which they cannot be blamed.

However, what concerns competition agencies is the non-price predatory behaviours exhibited by existing and dominant players such as excluding rivals from “platform software” (as was seen in the case of Microsoft in the US and EU) or influencing the choice of internet users by placing its own network services or the paid advertisers websites on top of search results. Further, charging excessive prices from advertisers for preferential placements on online search results or forcing consumers to “accept” unfair and often one-sided agreements could be examples of some exploitative conducts. The term “Network Neutrality”, which means that internet users should have the freedom to access and choose without any restriction from network providers, has been coined in this context and supports such demands against possible exploitative conducts by network providers.

The question, then, is whether we should give the market a chance to work before stepping in to regulate this nascent, dynamic industry? If the fast-paced growth of the online markets is any indicator, search engine giants like Google, with over 93% market share, or the social networking giant like Facebook cannot remain immune from competition law scrutiny for long and it will be prudent for the CCI to keep a close watch for any non-price predatory behaviour and send an appropriate message.

 Comdt. (Retd.) M. M. Sharma heads the Competition Law & Policy team in VA since 2009 and has over 30 years’ experience as an Advocate of Delhi High Court and holds a Post Graduate Diploma in Economics of Competition Law from Kings College, London. He has worked in the Competition Commission of India (CCI) as Additional Registrar during 2006-2008 and was responsible for drafting the Implementing Regulations under the Competition Act, 2002. He has experience of working as Head-Legal /In-house Counsel for a large Corporate Group in the Steel and Power sector before joining VA in 2009. He has represented clients as an independent arguing Counsel in landmark cases decided by CCI, the Competition Appellate Tribunal (COMPAT) , High Courts and the Supreme Court. As a prolific writer, he contributes articles and is regularly quoted on competition issues in National Newspapers and interviewed by TV Channels. He also teaches as a visiting faculty in various Universities and Institutions and is widely regarded as a subject expert in various Committees of Apex Business Chambers, such as FICCI, CII, ASSOCHAM and PHD CCI.
 Mr. Sharma has been mentioned as a “Notable Practitioner” in the “Competition/Antitrust” category of Chambers & Partners (Asia Pacific) Ranking of Leading Lawyers for Business in India for the year 2012 and 2013. VA’s competition law and policy team has also been awarded the Law Firm of the Year Award for “Competition/Antitrust Law” for 2013 by the Indian Business Law Journal.